The United States Supreme Court denied certiorari to the taxpayers’ appeal from the Kansas Supreme Court, concerning the constitutionality of ad valorem taxes on natural gas located in pipelines in Kansas. In re Appeals of Various Applicants from a Decision of Div. of Prop. Valuation of State for Tax Year 2009 Pursuant to K.S.A. 74-2438, 313 P.3d 789 (Kan. 2013) cert. denied, 13-1216, 2014 WL 1384664 (U.S. Oct. 6, 2014). In the case, the taxpayers did not own the actual natural gas in the pipeline under Federal Energy Regulatory Commission-approved tariffs. See id. at 794. Furthermore, “none of the taxpayers own[ed] any facilities in Kansas for the transmission, distribution, or storage of natural gas.” Id.
In addressing the constitutionality of Kansas’s imposition of ad valorem taxes, the Kansas Supreme Court applied the four-prong test from Complete Auto, which is used to assess the constitutionality of a state imposed tax under Commerce Clause. The Court assessed the first and fourth prongs of the Complete Auto test, namely the existence of a substantial nexus between the taxpayer and the state, and if the tax is fairly related to the services provided by the state. See In re Appeals of Various Applicants from a Decision of Div. of Prop. Valuation of State for Tax Year 2009 Pursuant to K.S.A. 74-2438, 313 P.3d 789, 799 (citing Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977)). The other two prongs, fair apportionment and nondiscrimination were not contested. See id. The Kansas Supreme Court held in a conclusory manner that there “is axiomatically a substantial nexus between Kansas and the gas stored in the state.” In re Appeals of Various Applicants from a Decision of Div. of Prop. Valuation of State for Tax Year 2009 Pursuant to K.S.A. 74-2438, 313 P.3d 789, 799. As for the Fourth prong of Complete Auto, whether the tax was in fair relation to the services provided, the Court determined that mere presence in the state was a sufficient relation for taxation. Id.
The Supreme Court’s denial of certiorari has created a conflict among states as to whether the Commerce Clause of the United States Constitution prohibits states from imposing ad valorem taxes on natural gas located within pipelines traveling through the taxing state. Both Kansas and Oklahoma have ruled that imposing ad valorem taxes in such circumstances do not violate the Commerce Clause. See In re Assessment of Pers. Prop. Taxes Against Missouri Gas Energy, Div. of S. Union Co., for Tax Years 1998, 1999, & 2000, 234 P.3d 938 (Okla. 2008).
Texas, however, has ruled otherwise. See Peoples Gas, Light, & Coke Co. v. Harrison Cent. Appraisal Dist., 270 S.W.3d 208 (Tex. App. 2008). The Court of Appeals of Texas ruled that ad valorem taxes on natural gas within pipelines violated the first and fourth prongs of Complete Auto. See id. As for the first prong of Complete Auto, requiring a substantial nexus, the Court ruled that there was no substantial nexus for the following reasons: “[Taxpayer] maintains no office in Texas. Nor does it have any employees, representatives, or physical facilities in the State. The physical facilities…belong to Pipeline… there is no evidence that any of the natural gas Peoples has purchased is delivered to any customer in Texas.” Id. at 218. Additionally, the Court ruled that the ad valorem tax violated the forth prong because “[state] services such as law enforcement and the fire department would serve…[a] facility [that] undoubtedly belongs to Pipeline, which does pay ad valorem taxes on both the ‘cushion’ gas it maintains in the facility and the physical plant of the facility itself.” Id. at 219.
Currently, the Supreme Court of the United States has not ruled directly on Commerce Clause compliance on the imposition of ad valorem taxes on goods in the course of property transportation in the post-Complete Auto era. However, in dicta from Japan Line, LTD. v. County of Los Angeles, the Court clearly indicates that the imposition of ad valorem taxes on goods “in the stream of commerce” is not invalidated by the Commerce Clause. Japan Line, Ltd. v. Los Angeles Cnty., 441 U.S. 434, 445-46 (1979). Certainly, goods being transported by common carrier is different than natural gas being transported by pipeline; however, the transitory nature is similar in that neither has a definitive situs. In Japan Line, the Court ruled that Los Angeles County’s imposition of ad valorem taxes on cargo containers violated the Commerce Clause because the containers belonged to a foreign enterprise and were instrumentalities of international commerce. See id. Crucially, the Court stated that “we may assume that, if the [goods] at issue here were instrumentalities of purely interstate commerce, Complete Auto would apply and be satisfied, and our Commerce Clause inquiry would be at an end.” Id. at 446.
This article was authored by Ryan Pulver, Jackson Kelly PLLC. For more information on the author, see here.